'Withdrawal of tax sops will be compensated'

NEW DELHI: Any withdrawal of exemptions that hurt corporate income would be compensated by the simultaneous withdrawal of dividend tax and capital gains tax on shareholders, according to Vijay Kelkar, chairman of the Task Force on Direct and Indirect Taxation.
While addressing an industry gathering in Delhi today he also said that the proposed removal of tax exemptions will play an important role in enhancing corporate governance in the country as income shown to shareholders should be the same as that used for tax purposes.
While defending the proposals made by the taskforce during a workshop organised by CII, he explained that the rationale of the reforms in the tax system was to promote growth, efficiency and employment in the economy by facilitating a reduction in costs across all sectors.
He attributed the high interest rate structure in the economy to the existence of tax exemptions and said that, “such tax incentives might be rational at the micro-level, but considering the overall higher interest rates structure in India compared to international markets, it might be irrational at the macro-economic level.�
While on the indirect tax front the rationalisation of customs and excise duty would lower transaction costs for the industry, the removal of exemptions in direct taxes would help in lowering the high interest rates that are hampering investments, he added.
Arguing in favour of withdrawal of exemptions, he stated that corporates serve as a vehicle for individual shareholders. Any withdrawal of exemptions that hurt corporate income would be compensated by the simultaneous withdrawal of dividend tax and capital gains tax on shareholders. This would also safeguard the interest of the small retail investors.
Dipankar Chatterji, member of the Task Force on Direct Taxes, responding to a query on treatment of interest expense on borrowed capital clarified that the deduction would continue to be available. As per the recommendations, what was earlier available under section 36(1)(iii) would be available under section 37 of the Income Tax Act.